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The history of franchising.

Written by: Jim Coen

Article Overview: Unless you’ve been living on another planet, you probably are familiar with franchising. You probably patronize a variety of franchised businesses without realizing that they are even franchises. These businesses run the gamut from gasoline stations and financial services to ice cream and carpet cleaning. Franchising is a part of everyday life. This article explores the history of franchising.

The history of franchising.

The word "franchise" comes from Old French meaning privilege or freedom.

As economies evolved, so did the concept of franchising. It is believed that our current concept of franchising comes from the mid 1800s when a major German beer brewer granted certain taverns the exclusive right to sell their beer and use trade name SPATEN.

The earliest signs of franchising in the United States dates back to the 1850's just after Isaac Singer invented the Singer Sewing Machine. During his search for an effective and affordable way to distribute his product, Singer ran into a couple of problems that prevented his company from becoming successful.

Singer's first problem was a lack of sufficient capital for manufacturing his machines. Secondly, no one was willing to buy his sewing machines without first being taught how to use them, which required effort that most retailers wouldn’t provide. Singer's solution was to charge licensing fees (franchise fees) to business people who would own the rights to sell his machines in certain geographical areas. The franchisees would also be responsible for teaching consumers how to use his machines, thereby creating sales opportunities.

Using the licensing fees to fund manufacturing, he was then able to afford to build his machines and then ship them directly to his newly formed distribution network.
Singer was the first company in the US to tap the power of franchising and made him and many franchisees very wealthy.

Singer's idea got noticed; and over the next several decades, many other companies began to copy and enhance his business model. At first, companies like Coca-Cola introduced franchising into their bottling and manufacturing areas in order to reduce financial risk, gain market share and bottle coca cola closer to the population centers thereby cutting down on trucking costs.

Automobile manufacturers used a network of licensed dealerships to sell and service their automobiles. Oil companies did the same thing with gas stations to keep those automobiles moving.

Later, companies such as McDonald's and Burger King took Business Format franchising to a whole new level by creating some of the largest franchise networks in the world.

Today, there are thousands of successful franchise brands with outstanding business models that provide products and services to consumers and businesses all around the world!

According to a study done by PricewaterhouseCoopers franchised businesses are responsible for 40% of all retail sales in the US. There are over ¾ of a million franchise establishments that generate almost a trillion dollars in sales. Franchises employ over 18 million people in the US directly and over 25 million indirectly.

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Related Forum Posts
Any franchising horror story? - I am always writing about the benefits of franchising in this forum. Although I don't own a franchise I do believe in franchising is a great business model. Do any of you have horror stories to share about franchising?
Re: STARBUCK - Licensing vs Joint venture - [quote="bmueller47":czemqiul]I often come here to learn something, therefore I would like to know what is the real practical difference between licensing and franchising. I might have an answer, but you are at the forefront with your knowledge.[/quote:czemqiul] Very good question. Although I am not an attorney, I will do my best to highlight what I believe are the main differences between franchising and licensing. First, here in the US, franchising is very regulated buy the Federal Trade Commission. Not anyone can franchise, you have to go through various steps. Licensing doesn't come with as much regulation. The franchisee can expect to have a very close relationship with his franchisor. In most cases, the franchisor will offer training, and on-going support. The franchisee will be able to use the franchisor's copyrights, trademarks, logo and so on. The franchisee is like the public face of the franchisor. This is I think the high value of franchising. Also, a franchise agreement will most likely define territories. The relationship between the licensee and the licensing company is much looser. In most cases, the licensee won't be able to retain the rights to trademarks, company name, etc and will have to establish his own identity in the marketplace. Licensees rarely get a protected territory which means you next door neighbor could be your competitor... Obviously, franchising is more expensive than licensing because you get a certain "safety". Again, franchising is highly regulated whereas licensing is not. There are many other differences between franchising and licensing but I think these are the main ones.
Re: What would you do with $500,000 or less? - Thanks David, I don't have any recent plans to travel to Japan but $35-$40 a night is a steal! I'm really into the history of Japan - any countries history for that matter. I want to experience living the lifestyle of the past (sitting on a mat may be a challenge for me though).
Re: Best way to start a business? - Hi. As always there are going to be so many different answers to this particular question. However you will find that the off-line trend towards franchising is one of the most successful business models and most of those guys had little or no experience at all in that field. What they did have though was capital and the help from the franchise's (?) management. naturally they were following a step by step system. My history has a lot of flea market experience in it , and i always found that that is a perfect way to start up small and test your product and skills carefully as you get along. each to his own i suppose. two years ago i closed my hammock business and declared myself a full time artist. and i must say that it was working out great until someone pulled the financial plug on the art buying public. wow. still it was fun. rob
Franchising is not a "no-cost" expansion model - Don's point above was right, and, if he only lost $5,000 getting into franchising, he got off very cheap. Getting into franchising is a serious business. We estimate that you need [u:32pu99ec]at least [/u:32pu99ec] $50,000 to do it right -- and it can cost five times that much for an aggressive expansion plan. Jim was right on. If you choose to franchise, you are getting into a new business -- the business of selling and servicing franchises. Mark


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